Limited liability companies offer the protections of a corporation without the strict and burdensome formalities. As such, they have become extremely attractive to small-business owners in recent years. Aside from the administrative and tax benefits they afford, one of the main advantages of forming an LLC is the protections its members enjoy. As with shareholders of a corporation, members of an LLC are generally protected from personal liability for debts of the business itself. This means that under most circumstances, creditors of the LLC cannot legally come after a member’s personal possessions to collect a debt.  While this protection from personal liability is certainly advantageous, it is important to understand that this protection is not unconditional.

One of the most common ways to hold a member of an LLC liable for the company’s debts is to bring legal action to “pierce the corporate veil.” When a court pierces the corporate veil, the court essentially disregards the corporate entity, thereby rendering the members personally liable for the company’s debts (or other wrongful acts). All states have slightly different standards for piercing the corporate veil, but in Missouri burden of proof is rather high. First, a plaintiff seeking to pierce the corporate veil must show that the member(s) control the company — not mere majority or complete stock control, but complete domination. Importantly, the creditor must show control not only of finances but also of policy and business practice in respect to the transaction attacked so that the corporate entity, as to the transaction at issue, had at the time no separate mind, will or existence of its own. In other words, the plaintiff must show that the LLC is the alter ego of the member(s). Missouri courts have found this first element to be met when the LLC is so dominated by a person as to be a mere instrument of that person, and indistinct from the person controlling it. Next, the plaintiff must establish that this control was used by the LLC to commit fraud or wrong, to perpetrate the violation of statutory or other positive legal duty, or to commit a dishonest and unjust act in contravention of the plaintiff’s legal rights. Finally, the plaintiff must show that the control and breach of duty were the proximate cause the plaintiff’s injury or unjust loss complained of. While these elements may seem difficult to prove, Missouri courts have demonstrated time and again that they are not afraid to pierce the corporate veil if the circumstances justify doing so.

For more discussion on the theory of piercing the corporate veil in Missouri, please review our Jan. 16, 2006, blog article titled “Piercing the ‘Veil’ of a Company’s ‘Limited Liability’ or Looking Through the Entity to Hold Owners Liable for a Company’s Debts.”

In addition to piercing the corporate veil, a member of an LLC will be personally liable if, among other things, he/she personally injures someone on the LLC’s premises, personally guarantees a loan or other business debt that the company is unable to pay off, or undertakes some type of intentional act that is fraudulent, illegal or reckless.

Importantly, while a member of an LLC will be held personally liable for the company’s debts under the appropriate circumstances, the reverse is also true. Sometimes, a member’s personal liabilities will allow a creditor to attack the member’s interest in the LLC. For instance, in Missouri, if a creditor obtains a judgment against a member of an LLC, the creditor will become what is known as a judgment creditor. At that point, the creditor can ask the court for a “charging order,” which allows the judgment creditor to enforce the judgment by charging the individual member’s distributional interest with the unsatisfied amount of a judgment. A charging order is highly effective, as it requires the LLC to pay over to the judgment creditor any distribution that would otherwise be paid to the LLC member.